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'Watershed moment' for American banking

Nervous investors pummelled financial stocks yesterday as the American banking crisis reached a &quot;watershed moment,&quot; casting more doubt on that country's deteriorating mortgage market, and by extension, the outlook for Canadian banks operating there.

By Rita TrichurBusiness Reporter

Tues., July 15, 2008

Nervous investors pummelled financial stocks yesterday as the American banking crisis reached a "watershed moment," casting more doubt on that country's deteriorating mortgage market, and by extension, the outlook for Canadian banks operating there.

American bank stocks bore the brunt of losses, some experiencing their sharpest declines in nearly 20 years, following the Federal Deposit Insurance Corp.'s seizure of mortgage lending giant IndyMac Bancorp Inc., which dove 57 per cent to 12 U.S. cents in New York.

Shares of Washington Mutual Inc., the biggest U.S. savings and loan company, and Ohio banking giant National City Corp. were trounced, falling 35 per cent to $3.23 and 8.5 per cent to $37.60 respectively, amid fears IndyMac's effective collapse augured serious lending troubles at other banks.

A Lehman Brothers' report suggested that Washington Mutual could face $26 billion (U.S.) in losses, with a whopping $21 billion from mortgages.

RBC Capital Markets, meanwhile, estimated that 300 U.S. banks might fail over the next three years because of credit losses and tense capital markets.

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IndyMac – renamed IndyMac Federal Bank when it reopened yesterday – is the fifth U.S. banking company to fail this year, the largest since the 1980s savings-and-loan crisis.

Irate customers lined up outside the company's Pasadena, Calif., headquarters yesterday to withdraw money, extending a bank run that has already seen withdrawals reaching $1.3 billion.

Moves by the U.S. government to shore up ailing mortgage lenders Freddie Mac and Fannie Mae did little soothe investors. Canadian bank stocks were quickly caught up in the downdraft, with the financials subgroup losing more than 3 per cent to close at 163.13 on the Toronto Stock Exchange.

Robert McWhirter, president and portfolio manager at Selective Asset Management Inc., said investors are worried about Canadian banks' exposure to the U.S., where many have made acquisitions in recent years. When it comes to bank stocks, "there appears to be more downside coming," he said.

Among Canadian banks, Bank of Montreal, which fell 4 per cent to $40.09 (Canadian) in Toronto, and Toronto-Dominion Bank, down 5 per cent to $55.74, have "the highest gross loan exposure to U.S. borrowers on both an absolute ($51 billion and $46 billion, respectively) and on a relative basis (25 per cent and 23 per cent, respectively) of consolidated loans outstanding," Blackmont Capital Inc.'s Brad Smith said in a note to clients.

"Despite its well-established U.S. retail banking and wealth operations, RY (Royal Bank) has only modest loan exposure at $25 billion or 10 per cent of consolidated loans outstanding. BNS (Scotiabank) and CIBC have the lowest U.S. loan exposures at 6 per cent and 3 per cent, respectively. However, CIBC has the highest loan exposure relative to U.S. credit if its credit derivative (CDS) portfolio is taken into consideration."

The latest Horizons BetaPro sentiment survey found 47 per cent of investment advisers have a "bearish view" of Canadian financial stocks due to rising inflation and higher long-term interest rates.

Adrian Mastracci, a portfolio manager at KCM Wealth Management Inc., suggested financials are undergoing a major shift. "Consumers have no savings. Everyone is looking for a rescue."

The financial crisis has claimed other casualties in the past year. Northern Rock PLC, Britain's largest mortgage lender, was first to undergo a government-backed rescue. The U.S. Federal Reserve assisted in a Bear Stearns Cos.' bailout.

Meanwhile, Merrill Lynch & Co., which is expected to post a second-quarter loss on Thursday, expanded its Canadian footprint yesterday with a ribbon-cutting ceremony at its new technology centre in Toronto.

Merrill Lynch Canada Services Inc. is expected to employ "several hundred" people over the next few years. It is being launched at a time when Toronto is working to heighten its profile as a global financial services hub.

"Companies like Merrill Lynch setting up this kind of centre here are extremely significant in that context because of Merrill Lynch's global reach," said Toronto Mayor David Miller.

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